The Bank obeyed few of the commandments of good stewardship

Like Moses, Mervyn King went among the media yesterday handing out his outlook
for the domestic economy, grey hair and robes flapping in the recessionary
gale. His inflation report is pored over by economic scribblers but where
the tome was once seen as a dull but reliable tablet of stone, it's now
showing the cracks.

For an organisation that failed to heed the very obvious warning signs of impending recession and economic instability over the past year, the report is taken extraordinarily seriously, rather than taken with a large pinch of salt as it should be.

The fact is the Bank of England got it wrong on inflation because it got it wrong on the UK economy in general. Yes, there have been extreme conditions buffeting the UK and I doubt we could have avoided recession. But if decisive action had been taken earlier, we might not be facing the worst recession among G7 countries. Neither am I talking with the benefit of hindsight. There was plenty of evidence and accompanying warnings that an economic slowdown would be the inevitable result of the credit bubble. This kind of analysis last year, and even in 2006, was often dismissed as simply talking ourselves into recession when in fact it was trying to talk us out of one by encouraging suitable policy responses such as cutting interest rates, cutting wasteful public spending and cutting taxes.

The Government's own financial ineptitude has left us fighting this battle without ammunition, beyond the brilliant idea of borrowing even more to get us out of a debt crisis. So the Bank of England has not been dealt an easy hand. But its inability to look beyond an academic study of Consumer Price Inflation and out into the broader economy when setting interest rates has contributed to the mess we're in.

The Inflation Report's forecasts use fan charts, the statistical equivalent of casting your net as wide as possible when it comes to predicting the future. The catch-all charts contain a dark shaded area which are the Bank's central forecasts which have economists grappling with rulers to try to decipher what's being said. Precise figures are in short supply, which is perhaps not that surprising given we're crystal-ball gazing here. However, economists take a stab at interpreting the report and yesterday concluded we're looking at a maximum peak-to-trough shrinkage of the economy of 2pc with 2009 contracting 1.3pc and 2010 showing growth of 1.7pc. If we get away with that we should consider ourselves the luckiest generation since the Red Sea was parted. Certainly, that outcome wouldn't imply the need to slash interest rates to zero as King suggested could happen yesterday. He did at least warn that, given the current circumstances, his fan charts needed to be interpreted with "particular caution".

Simon Ward of New Star Asset Management reckons that the average outcome we should expect, based on the last three recessions, is a peak to trough contraction of 2.3pc. This implies a fall in GDP of 1.7pc next year and rather more anaemic growth of 0.4pc in 2010. Who knows?

The inescapable fact, however, is that the Bank's pursuit of price stability as enshrined in the 1998 Bank of England Act has not led to stable employment and growth. It has led to the exact opposite. If all our woes are to be blamed on external factors then we need a new method of setting interest rates that reflects that.

If, however, our fate is at least partially in our own hands then the current arrangements are failing and you can see the evidence for that all around you. Given the scale of this financial crisis, it is untenable that the remit and methodologies of the Bank's Monetary Policy Committee are not, at least, subject to review.

Indebted to drugs

Perhaps the way to climb out of this economic trough is to start taking drugs. Pop a pill and you could repress those cowardly risk-averse instincts and instead transform yourself into a bold entrepreneurial champion. It's basically Viagra for business and is the idea of professors at Cambridge University who reckon levels of dopamine in the brain could be enhanced to release our risk-taking inner selves. Brain storming meetings would never be the same again as we all drop a tab of the money drug and plot the next deal of the century. It would give us an economy on steroids. I would insist on it being available through the National Health Service to treat the terminally timid. It could release so much creative risk-taking that we'd create enough wealth to do away with the welfare state - think about the tax saving potential.

As with all drugs, however, it would have a dark side. Addicts would presumably end up blowing their entire wealth on the toss of a coin.

It's all theory at the moment but I'm not sure there isn't already a black-market version being pushed on the streets of the City of London. When you consider the risks taken with our money by bankers and fund managers resulting in the credit crunch – the biggest downer in financial history – it's hard to believe they weren't on drugs the whole time.